What the Inflation Reduction Act Means for ESG and Sustainability

Sustainability professionals, climate activists, and economists alike are calling it the biggest climate legislation in American history – and for good reason. The Inflation Reduction Act (IRA) has already been approved by the House and Senate with every expectation it will be signed into law by President Biden. The bill will pour $369 billion in subsidies and tax credits into electric vehicles, renewable energy, carbon capture and storage, and more. With this, the IRA is projected to reduce total U.S. greenhouse gas emissions 40% by 2030, putting the United States back in shooting distance of its Paris Climate Agreement emissions reduction goals.

Fred Krupp, a longtime champion of congressional action on climate change and head of the Environmental Defense Fund, a green group, said “This has been decades in the making, and it will reshape the decades ahead...”

Here are the key takeaways for corporations and investors as it relates to ESG and Sustainability:

Tax Credits for Renewable Energy

At the center of the IRA’s remit to reduce greenhouse gas emissions is a system of tax credits for renewable energy. This includes the Renewable Energy Production Tax Credit, which provides tax relief for manufacturers of solar, offshore wind, geothermal, hydrogen, nuclear. The bill also includes energy loans and reinvestment financing for energy-related projects, subsequently incentivizing U.S. based renewables manufacturing.

Funding for High-Carbon Industries

Agriculture, real estate, and shipping industries are the victors in this provision, with $300 million allocated to the National Resources Conservation Service for emissions reduction and carbon capture, $2 billion allocated to reduce emissions at shipping ports, and new tax deductions for converting existing real estate assets into high-efficiency green buildings.

In relation to carbon reduction, the bill increases the 45Q tax credit for companies that build and operate carbon capture and storage facilities from $50 to the now $85 per ton, for the purposes of incentivizing carbon sequestration advancements in hard-to-abate sectors like cement, steel, and refining.

Funding for GHG Emissions Reporting

The IRA provides $5 million for the Environmental Protection Agency (EPA) to support the “standardization and transparency” of corporate climate disclosures, signaling to companies that quality control for non-financial indicators of performance such as energy efficiency and waste management will become increasingly significant for companies of all sizes. It also aligns to the new rules in the SEC’s Climate Proposal.

Grants for Climate Resilience and Adaptation

In addition to reducing carbon emissions, the IRA provisions could generate enormous public health and jobs benefits, preventing up to 3,900 premature deaths from air pollution in 2030, in addition to 99,000 to 100,000
avoided asthma attacks, and 405,000 to 417,000 avoided lost workdays.

As a percentage decrease, avoided deaths are concentrated in communities of color, which have historically experienced the most harm from air pollution. Disadvantaged communities are often located near polluting infrastructure and, on balance, the bill’s provisions reduce health burdens more in communities of color. The bill also funds resilience and energy efficiency programs for affordable housing projects. These programs will create a wave of new business in these communities.

Private Equity and Hedge Funds Pay Less, Stock Buybacks Pay More

Additionally, the plan to close the “carried interest loophole”—which primarily benefits private equity firms and hedge funds—was cut to secure support from Arizona Senator Kyrsten Sinema. This means that profits from those industries continue to be taxed at the lower capital gains tax rate rather than as income.

An Investment in Our Economy and Climate

The Inflation Reduction Act is more than just a climate act, it is an investment in our economy and climate. This bill will transform how Americans get their energy and shape the country’s climate and industrial policy for decades. This effectively catapults the United States, the world’s second-biggest carbon emitter after China, to the forefront of countries taking concrete action on combating climate change after months of appearing as if it would lose its status as a global leader in the fight.